Private sector lending slides to 22%

ISLAMABAD: Lending by Pakistan’s banking sector to private businesses and consumers stood at just 22% of total assets as of March 2026, underscoring a widening gap between banks and the wider economy as financial institutions increasingly channel funds into government borrowing instead of productive credit.

Figures compiled by Optimus Capital Management show the banking sector’s total assets have risen to around Rs60 trillion. However, this expansion has not translated into stronger conventional lending to businesses and households. The data indicate that banks are operating with record leverage, with the assets-to-equity ratio, excluding surplus, reaching a historic 18 times.

That means banks are holding Rs18 in assets for every rupee of equity, with most of those assets invested in government securities rather than directed toward private enterprise. Maaz Azam, research head at Optimus Capital, said, ‘Absence of private credit allows banks to push leverage to historic highs.’

Banks have increasingly preferred government debt because of its perceived low risk. In an environment of elevated interest rates and continued economic uncertainty, institutions have found it more attractive to place liquidity in Pakistan Investment Bonds and treasury bills. Unlike lending to private borrowers, which requires detailed credit evaluation and carries risk weightage that affects capital adequacy, lending to the government carries virtually no credit charge, Azam explained.

The report also highlighted how this balance sheet growth is being financed. Rather than relying mainly on customer deposits, Pakistan’s banking sector is increasingly dependent on wholesale borrowing, which now makes up 27.1% of total banking assets, or more than Rs16 trillion.

Much of that liquidity is being supplied by the State Bank of Pakistan through open market operations. The result, is a circular flow in which the central bank injects liquidity into commercial banks, which then use those funds to buy government debt. While this arrangement helps finance the government’s fiscal deficit, it also leaves private borrowers facing either limited access to credit or borrowing costs that are too high.

The structure has developed in part because International Monetary Fund restrictions bar direct government borrowing from the State Bank of Pakistan in order to prevent ‘hidden inflation’. As a result, liquidity is routed through commercial banks, a process that has contributed to historically high leverage in the banking system.

Optimus Capital said weak private credit is not just a banking indicator but also a sign of a slowing industrial sector. Without financing, businesses are unable to expand, upgrade operations or innovate. The retail segment is also affected, with little demand or supply for housing finance, auto loans and personal credit.

Even though the economy is showing limited signs of stabilisation, private sector credit growth remains ‘very little’ compared with the broader money supply. Low credit penetration acts as a structural constraint on GDP growth as banks continue to favour the ease of financing the state over lending to the real economy.

Analysts cited in the report warned that the combination of high leverage and weak private lending has created a fragile banking structure. With 27.1% of assets financed through borrowing, any abrupt change in central bank liquidity conditions or government fiscal policy could expose the sector to risk. Banks are able to sustain strong profitability through leverage and interest income from government paper, reducing pressure to compete for deposits or improve services for the public.

For comparison, the World Bank estimates private credit-to-GDP ratios at about 50% in India and 40% in Bangladesh, highlighting the relatively low level of credit penetration in Pakistan.